Berkshire Hathaway 2017 Annual Meeting Audience Question # 4

The status of the “moat” around Berkshire’s subsidiaries

Warren Buffett:

OK, Becky? Becky Quick.

Becky Quick:

This question comes from a shareholder named Mark Blakley in Tulsa, Oklahoma, who says, “There has been more news than usual in some of Berkshire’s core stock holdings.”

“Wells Fargo in the incentive and new account scandal, American Express losing the Costco relationship and playing catch-up in the premium card space, United Airlines and customer service issues, Coca-Cola and slowing soda consumption.”

“How much time is spent reviewing Berkshire’s stock holdings? And is it safe to assume, if Berkshire continues to hold these stocks, that the thesis remains intact?”

Warren Buffett:

Well, we spend a lot of time think… those are very large holdings. If you add up American Express, Coca-Cola, and Wells Fargo, I mean, you’re getting up, you know, well into the high tens of billions of dollars. And those are businesses we like very much. There are different characteristics.

In the case of… you mentioned United Airlines, we actually are the largest holder of all four of the… we’re the largest holder of the four largest airlines. And that is much more of an industry thought.

But all businesses have problems. And some of them have some very big pluses.

I personally… you mentioned American Express. If you read American Express’s first quarter report and talk about their Platinum Card, the Platinum Card is doing very well.

The gains around the world. You know, I think there were 17 percent or something like that in billings in the U.K. and 15 percent is original currency… or the local currency… Japan, Mexico, and very good in the United States.

There’s competition in all these businesses. If we thought… we did not buy American Express or Wells Fargo or United Airlines, Coca-Cola, with the idea that they would never have problems or never have competition.

What we did buy… why we did buy them… is we thought they had very, very strong hands. And we liked the financial policies in the cases of many of them. We liked their position.

We’ve bought a lot of businesses. And we do look to see where we think they have durable competitive advantage.

And we recognize that if you’ve got a very good business, you’re going to have plenty of competitors that are going to try and take it away from you. And then you make a judgment as to the ability of your particular company and product and management to ward off competitors.

They won’t go away, but the… we think… I’m not going to get into specific names on it… but those companies generally are very well-positioned.

I’ve likened essentially… if you’ve got a wonderful business, even if it was a small one like See’s Candy, you basically have an economic castle. And in capitalism, people are going to try and take away that castle from you.

So, you want a moat around it, protecting it in various ways that can protect it. And then you want a knight in the castle that’s pretty darn good at warding off marauders. But there are going to be marauders. And they’ll never go away.

And if you look at… I think Coca-Cola was 1886. American Express was 18… I don’t know… ’51 or ’52… starting out with an express business.

Wells Fargo was… I don’t know what year they were started. Incidentally, I… American Express was started by Wells and Fargo as well.

So these companies had lots of challenges. And they’ll have more challenges. And the companies we own have had challenges.

Our insurance business has had challenges. But, you know, we started with National Indemnity’s $8 million purchase in 1968. And fortunately, we’ve had people like Tony Nicely at GEICO. And we’ve had Ajit Jain, who’s added tens of billions of value.

And we’ve got some smaller companies that you probably don’t even know about, but really have done a terrific job for us.

So there will always be competition in insurance, but there will always be things to do that a really intelligent management with a decent distribution system, various things going for him, can do to ward off the marauders.

So I… there was a specific question, “How much time is spent reviewing the holdings?” I would say that I do it every day. I’m sure Charlie does it every day.


Charlie Munger:

Well, I don’t think I had anything to add to that, either.

Warren Buffett:

We’ll cut his salary if he doesn’t participate here.

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